Realities Of The Letters Of Indemnity Liabilities

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The cargo misdelivery claim in Trafigura Maritime Logistics Pte Ltd v. Clearlake Shipping Pte Ltd (Miracle Hope) [2022] EWHC 2234 (Comm) gave rise to various issues under the letters of indemnity (LOIs) that had been given in order to secure delivery of the cargo without presentation of the original bills of lading.

In earlier judgments, the Court gave useful guidance on the International Group of P&I Club LOI wordings. It also clarified the security obligations of intermediate parties in a charterparty chain under back-to-back LOIs.

In the latest judgment, the Court construed the rather unsatisfactory language of the relevant LOI wordings in their commercial context and concluded that the indemnities were enforceable along the charterparty chain. Significantly, the Court found that the novation of an intermediate sub-charter to the charterer’s related company did not prevent the indemnities passing along the charter chain.

Back-to-back terms

In brief, Ocean Light Shipping Inc timechartered the vessel to Trafigura Maritime Logistics Pte Ltd; Trafigura sub-chartered to Clearlake Chartering USA Inc; and Clearlake sub-chartered to Petrobras for the carriage of an oil cargo from Brazil to China. The cargo had been sold by a subsidiary of Petrobras to Hontop Energy (Singapore) Pte Ltd, who had financed the purchase through an irrevocable letter of credit issued by Natixis Singapore.

The two sub-charters were on materially back-to-back terms, based on the Shellvoy 6 form, which contains deemed LOI wording, with the LOI subject to English Court jurisdiction.

Some of the cargo was subsequently discharged in China without presentation of the original bills and as against indemnities provided under the relevant charters. After discharge and delivery took place, Clearlake Shipping Pte Ltd replaced Clearlake Chartering in the sub-charter with Trafigura by way of an addendum.

Hontop became insolvent and Natixis arrested the vessel in Singapore, alleging that they had not been reimbursed by Hontop under the letter of credit. Natixis sought security from Ocean Light for its misdelivery claim, which it brought as lawful holder of the original bills of lading. This led to claims for indemnity (including security sufficient to enable the vessel to be released from arrest) down the chain of LOIs, but no indemnity was forthcoming up the chain.

In due course, the English Court made orders against both Clearlake and Petrobras requiring them to provide security to Natixis so that the arrest could be lifted. Ocean Light had obtained similar relief against Trafigura in arbitration. As a result of the arrest, however, Trafigura lost a follow on fixture and sought to claim its loss of profit, as well as the expenses it incurred as a result of the vessel’s arrest. Both Clearlake and Petrobras disputed the claims under their respective LOIs.

Commercial Court decision

As the sub-charters were materially back-to-back, Clearlake adopted Petrobras’ various defences to liability under the LOIs, all of which were dismissed by the Court.

Specifically, clause 33(6) of the sub-charters provided among other things that if there was a request to discharge the cargo without presentation of original bills, owners were to do so “in consideration of receiving an LOI as per Owners’ P&I Club wording to be submitted to Charterers before lifting the “subs””. No such wording was submitted before the charters became unconditional but, given the commercial context, the Court rejected the argument that this meant there was no entitlement to an indemnity. Rather, it found that “… before lifting the “subs”” was surplus wording and of no effect and, once the parties lifted subs, they waived compliance with this provision.

The Court also found that, on its true construction, the wording of clause 33(6) did not require a formal written letter of indemnity document to be received by the disponent owner concerned before it could become entitled to an indemnity. Rather, there was a deemed indemnity “as per Owners’ P&I Club wording” where the charterer concerned indicated by fax, telex or email that it accepted the wording proposed and the cargo was then discharged. On the facts here, an email sent by Petrobras to Clearlake amounted to a valid invocation of clause 33(6) and Clearlake had evinced a similar intention up the chain to Trafigura.

Liability decision

The Court also gave short shrift to Petrobras’ argument that it gave discharge, not delivery, instructions and that owners should have discharged the cargo but retained control of it. The discharge instructions themselves did not say so, nor was there any arrangement between the parties as to storage of the cargo following discharge. The parties to these charters and to the LOIs had also used the words “discharge” and “delivery” interchangeably. The Court, therefore, concluded that in principle both Clearlake and Petrobras were liable under their respective LOIs.

This liability was subject to a potential break in the chain of charterparties/indemnities. The novation of the charterparty between Clearlake Chartering and Clearlake Shipping meant that Clearlake Chartering no longer had any liability to Trafigura because Clearlake Shipping had taken on any such liability. In fact, the LOI to Trafigura had been provided by Clearlake Shipping, even though at that time it had no liability to Trafigura (because the charter had not yet been novated). At the same time, there was no contractual relationship between Clearlake Shipping and Petrobras.

On the evidence, however, the Court concluded that the two Clearlake entities intended that there should be an internal indemnity that was binding between them and so was capable of enabling any obligations that arose from compliance with Petrobras’ delivery orders to be passed along the charter chain.

In conclusion, therefore, the indemnity claims were upheld and Trafigura was entitled to recover in respect of its losses.

The Court has once again demonstrated that it will not allow parties to LOIs to escape easily from their liabilities, particularly on technicalities. However, in order to avoid disputes of this nature, it is important to check LOI and charterparty wording carefully to avoid inconsistencies and unclear language. Particularly where there is a charterparty chain and a series of LOIs, as in this case, it is worth ensuring that indemnity obligations are as back-to-back as possible and that any intra-group arrangements do not have undesirable consequences.

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Source: Balticexchange

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